Last Thursday, the Congressional Budget Office released a report on “The Economic Effects of Legislation to Reduce Greenhouse-Gas Emissions.” The report attempts to quantify the economic cost of the proposed policy changes–answering the (relatively narrow) question: what would be the negative effect on GDP caused by higher prices of carbon-based energy? The trouble is the report doesn’t attempt to quantify the benefits of the proposed legislation–so it’s not clear how useful this report will be to policymakers who should ideally at least implicitly be weighing social costs against social benefits in deciding whether policies are in fact worth pursuing.
In his blog, CBO director Doug Elmendorf summarizes their conclusions (emphasis added):
CBO concludes that the cap-and-trade provisions of H.R. 2454, the American Clean Energy and Security Act of 2009, would reduce GDP below what it would otherwise have been—by roughly ¼ to ¾ percent in 2020 and by between 1 and 3½ percent in 2050. By way of comparison, CBO projects that real (that is, inflation-adjusted) GDP will be roughly two and a half times as large in 2050 as it is today, so those changes would be comparatively modest. In the models that CBO reviewed, the long-run cost to households would be smaller than the changes in GDP because consumption falls by less than GDP and because households benefit from more time spent in nonmarket activities. Moreover, these measures of potential costs do not include any benefits of averting climate change.
In fact, the CBO report acknowledges (on pages 3-4) that they avoid the thorny issue of valuing the cost of climate change itself (and the benefit of avoiding climate change). They explain (emphasis added):
Despite the wide variety of projected impacts of climate change over the course of the 21st century, published estimates of the economic costs of direct impacts in the United States tend to be small. Most of the economy involves activities that are not likely to be directly affected by changes in climate…
[A] relatively pessimistic estimate for the loss in projected real gross domestic product is about 3 percent for warming of about 7° Fahrenheit (F) by 2100. However, even for the levels of warming that have been examined, most of the estimates cover only a portion of the potential costs. Other costs in the United States could come from nonmarket impacts (which are not measured in GDP) and from the potential for abrupt changes…
They go on to explain that the “nonmarket impacts” of climate change:
are very difficult to evaluate in monetary terms because they do not directly involve products that are traded in markets. Although such difficulties apply to effects on human health and quality of life, they are particularly significant for biological impacts, such as loss of species’ habitat, biodiversity, and the various resources and processes that are supplied by natural ecosystems. Experts in such issues generally believe that those nonmarket impacts are much more likely to be negative than positive and could be large.
(Note the mention of this problem measuring “nonmarket” benefits as applicable to “effects on human health”–and hence the debate over health care reform–as well. I’ve said before that the reasons to expand health care coverage shouldn’t be limited to “because it will save money”–even over the longer run. Presumably we choose to “buy” things, and on net pay out money, for a reason.)
The CBO report also discusses the small possibility of a potential abrupt and catastrophic effect of climate change which could have large economic costs (as well as broader social costs) but (again) which economists don’t really know how to quantify given the tremendous scientific uncertainty:
Experts believe that there is a small possibility that even relatively modest warming could trigger abrupt and unforeseen effects during the 21st century that could result in large economic costs in the United States. Two examples of such possible effects are shifts in ocean currents that could change weather patterns and affect agriculture over large areas, and rapid disintegration of ice sheets, which could dramatically raise sea levels around the world. The sources and nature of such abrupt changes, their likelihood, and their potential impacts remain very poorly understood.
What I see as the trouble with CBO–known as the official “scorekeeper” for legislation being considered by Congress–doing a quantitative analysis of the “economic effects” of climate change policy, is that all their qualifying statements about their inability to quantify (in dollar terms) the main point of climate change policy (avoiding environmental damage and what that means for the broader well-being of our society) will be lost on the policymakers, and hence on the public as well. People look for the numbers in a CBO report and will surely use the numbers about what’s bad about climate change policy as a reason not to enact that policy, as long as there are no concrete numbers to support the merits of the policy. In other words, it’s hard for CBO to be the unbiased arbiter on policy evaluation if they’re only “tooled up” on one side of the debate.
That’s why the report released this week on alternative measures of well-being (getting beyond aggregate, market-based GDP in particular), commissioned by French President Sarkozy and written by Nobel laureates Joseph Stiglitz and Amartya Sen is particularly relevant and timely. There’s a nice summary of the report’s findings on the International Political Economy Zone blog. And here’s a link to a Bloomberg article on Stiglitz’s position, which contains this “money quote” (ironic pun intended):
“So many things that are important to individuals are not included in GDP,” said Stiglitz, a Columbia University professor.
How about that? Even very wise economists understand that well-being and true happiness go beyond things that have dollar signs in front of them.